Cash Balances Essay

Cash Balances Essay

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Consequently, we concentrate only on the transactions and precautionary motives of the firm, with these needs being met with balances held both in cash and in marketable securities.
It is necessary to obtain frequent report, generally day byr day, on cash balances in each and every company’s bank account, on cash disbursements, on average daily balances, and on the marketable securities position of the firms as well as a detailed reports on changes in this position.
John Maynard Keynes suggested three reasons for the individuals to hold cash.
1. Keynes labeled these motives as follows: transactions, speculative, and precautionary.
All the information is essential if the firm is to manage its cash in an efficient manner – one that provides for safe and convenient cash availabilities and for reasonable investments income on the temporary investments of cash.
In addition to the cash budget, the firm needs systematic information on cash as well as some kind of control system.
Precautionary motive: to maintain a safety cushion or buffer to meets the unexpected cash needs.
The increase predictable the inflows and outflows of cash for a firm, the low cash that needs to be held for precautionary needs.
It is important to point out that not all of the firm’s needs for cash call for holding cash equal exclusively.
The second and third item in the preceding lists collectively represent collection float, the total time between the mailing ...

... middle of paper ... consideration.
Outsourcing – shifting an ordinarily “in-house” operation to an outside company – is not new idea when its comes to cash management.The increase in interest rates available on marketable securities, of course the greater will be the opportunity cost to maintaining idle cash balances.
The optimal level of cash would be the larger (1) the transactions balances required when cash management are efficient,or (2) the compensating balances requirements of the commercial banks with which the firm have deposit accounts.
Also, the higher the interest rate, the greater will be the opportunity cost of holding cash, and the greater the corresponding desire to decrease the firm’s cash holdings, all other things are the same.
They dont want to maintain excess cash balances because interest can be earned when the funds are invested in marketable securities.

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